Question

What is the point of breaking the CF Statement into categories? Can't you figure it out simply by looking at a comparative Balance Sheet?

Answer 1

We prepare Cash Flow Statement to show how cash has been used during an accounting period. This can help a business prepare a strategy when going to market. For example, if your cash flow is running negative a company can look to cut expenses, increase sales, or maybe negotiate margins on contracts or with vendors. If a company has a lot of excessive cash they can look to see what areas of their business they want to improve, this could be done by purchasing assets, hiring new employees, approving overtime for R&D. Now lets see the 3 Parts of Cash Flow and why breaking into parts in necessary :
1) Cash Flow From Operating Activities : This part show that how much cash inflow and outflow has been made by company from its core business(core business is the main business of company), this is important for users to know because they want to know before investing that company has growth potential or not. A negative operating cash flow would mean the company could not continue to pay its bills without borrowing money (financing activity) or raising additional capital (investment activity).

2) Cash Flow From Investing Actvity : Cash Flow from Investing Activities is the section of a company’s cash flow statement that displays how much money has been used in (or generated from) making investments during a specific time period. Investing activities include purchases of long-term assets (such as property, plant, and equipment), acquisitions of other businesses, and investments in marketable securities (stocks and bonds).By looking at this category one can know that is company investing in good areas or not , or one can also identify from this category that comapny is actually having enough cash to invest their money in different areas.

3) Cash Flow From Financing Activity : Cash flow from financing activities (CFF) is a section of a company’s cash flow statement, which shows the net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends. By this one can know that how much Equity or debt was raised in cash and how much return in form of dividend or interest was paid to them.

This was the detail why we need to break cash flow in parts now lets discuss tha why we Can't figure it out simply by looking at a comparative Balance Sheet.

i) Comparitive balance sheet will show us only increase or decrease in cash , now look at a scenerio where in 2019 Cash Balance was $5000 and in year 2020 cash balance was $20000. By looking the overall picture one can get mislead that company is doing good however in its cash flow statement
Cash Flow from operating activity was   ($2000)
Cash Flow From Investing Activity(Majorly sale of land) $10000
Cash FLow From Financing Activity ( Majorly Raised Loan & Equity) $7000

By looking at this kind of cash flow one can identify that Company is having cash crunch, and company's business is not performing well thus company is liquidating its asset and raising money from other sources to survive.

ii) Cash flow statement gives us broad view that actually where companies money has been utilised.
another example could be like those investor who majorly earn from dividend will look in companies financing activity and will look that is company paying good dividend amount., or money lender will look that company is generating enough cash flow from operating activity so to ensure themselves that company will repay their amount.

There can be many such examples but the main thing is Cash Flow statement is detailed statement of Companies Money while Balance Sheet only gives comparitive detail. But as an investor , lender, employee we need to look in broad terms.